(3 votes)


  • Huge late-stage pipeline leaves room for many catalysts and should bolster future revenue streams
  • Numerous growth opportunities from drug acquisitions, biosimilars, and international expansion
  • Strong financials indicate that Amgen is undervalued compared to industry peers and is healthy from an intrinsic valuation standpoint 
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(1 vote)

On Sunday June 16th, medical device maker Medtronic announced its plans to buy Covidien for $43 billion in debt and stock, the largest transaction in medical device history. Each Covidien share was valued at $93.22, paid by $35.19 in cash and .956 Medtronic shares, representing a 29% premium to Covidien’s closing stock price on June 14th. This will leave Covidien shareholders with 30% of the combined company, resulting in $850 million pre-tax cost synergies by the end of 2018. A successful merger would create the world’s largest medical technology producer, surpassing the incumbent Johnson & Johnson.

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(2 votes)

We have a strong buy recommendation for Chipotle mainly driven by third quarter solid comps growth of 19.8% year over year and an increase in EPS to $4.15, increasing 56% year over year. Chipotle has enjoyed 8% comparable sales growth over the past three years resulting from accelerated traffic growth of 12%. In the second quarter the average transaction size increased by 5%, while raising prices by 5 to 6%.


Chipotle Mexican Grill opened in 1993 and is a fast casual restaurant based in Denver, CO offering fresh Mexican food.  Chipotle caters to its target customer of health conscious consumers, offering a simple menu structure of burritos, tacos, burrito bowls, and salads.  The company has 1,656 restaurants domestically as well as global units, including 7 in Canada, 6 in England, 3 in France, and 1 in Germany.  The current PPS is $638.52 and the 52-week range is $472.41-697.93.


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(3 votes)

Company: Consol Energy Inc.

Ticker: CNX

Price: $38.90

52-week range: $32.96 - $48.30

Market Cap: $8.95B

P/E (ttm): 11.80

Recommendation: BUY


CONSOL Energy, Inc. produces coal and natural gas for global energy and raw material markets. Historically, coal production has been responsible for the majority of its revenue, but recently the company has been putting more emphasis in the natural gas sector.

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(7 votes)


Turn on CNBC right now, and it won’t take long for M&A news to show up. According to a recent report by Thomson Reuters, global M&A activity was up 73% in the first half of 2014 compared to the first half of 2013, which was the strongest first half gain since 1998. The healthcare sector led the markets in total deal value, comprising of 18% of all M&A deals. Out of the top 15 announced deals in the last six months, seven were in the healthcare sector. Deal news such as Pfizer’s attempted acquisition of AstraZeneca, Medtronic’s acquisition of Covidien, Allergan’s attempt to hold off Valeant, and AbbVie’s takeover of Shire have taken over recent financial headlines.

This trend is no coincidence, as there are three key factors behind the continuing rise in healthcare deal volume. There is an ongoing shift in pharmaceutical and biotech corporate strategy, firms are cashing in on the benefits offered by tax inversions, and U.S. equities are at an all-time high while interest rates still remain low.

The average cost of developing a new drug has skyrocketed from $1.1 billion in the late 1990’s to over $5 billion in 2013. This increased investment has forced drugmakers to focus on more targeted illnesses, especially those such as oncology, immunotherapies, and anti-infectives, which don’t yet have effective treatments on the market.

R&D into these tougher ailments has traditionally been done by smaller biotechs, which place all their chips into a few treatments with huge financial upside and risk. Larger pharmaceutical companies, which have traditionally been publicly-held, tended to invest in treatments that had a larger potential market, and more scientific research to minimize the risk of clinical trial failure. These firms, known in the industry as “Big Pharma,” would often acquire smaller biotechs only after a successful track record had been established.

Recently, more and more pharmaceutical firms have been acquiring biotechs that have promising pipelines, but may not have necessarily passed any phase III trials yet. They are taking this risk due to the significant impact that patent cliffs are having on top-line revenue for Big Pharma, and the excess amounts of cash that these firms are sitting on from the high profit margins and cash flow in the industry.

Conversely, smaller biotechs have a much tougher time raising cash, with many biotechs still remaining profitless since inception, so they welcome the increased cash flow and synergies that come with the resources of a big pharmaceutical firm.

Another factor in these recent healthcare deals, which is less relevant to small biotechs, is the tax inversion benefits that U.S. pharmaceutical companies receive by acquiring or merging with a company based in countries such as the U.K., Ireland, and the Netherlands, where corporate tax rates are significantly lower.

There has been talk amongst U.S. lawmakers to introduce legislation aimed at companies seeking an inversion, which may have led to a rise in recent deals in fear of losing this window of opportunity. Just last week, U.S. Treasury secretary Jack Lew urged Congress to crack down on inversions, calling for a need in “economic patriotism.” In my opinion, there is nothing unpatriotic about a company in the capitalistic U.S. economy strategically re-incorporating in foreign domiciles to save billions in annual tax expenses.

In terms of corporate strategy, inversions are a no-brainer as companies with business locations in the U.S. still enjoy intellectual property protection, government and private support for research and development, and the investment climate and infrastructure of the U.S, while paying less in taxes.

I don’t expect any measure aimed at putting restrictions on inversions to succeed in Congress, but we could certainly see legislation that would restructure U.S. corporate tax laws to be more business-friendly, given that the 35% corporate tax rate in the U.S. is the highest amongst developed nations.

Anyone who has been following the markets recently knows that both the S&P 500 and the Dow Jones Industrial Average are currently at or hovering near all time highs, adding to the 33% gain in the S&P in 2013.

The Fed’s quantitative easing program has kept interest rates relatively low compared to historic rates, with the 10-Year Treasury yield right around 2.50%. While yields aren’t as low as they were in 2012-2013, the last time the 10-Year yield hit 2.50% was back in the early 1950’s.

A notable figure is that in 2013, average earnings only went up 4%, far less than the market’s gain of 33%, indicating massive multiples expansion. The rise in equities makes deals more favorable to both acquirers and potential targets. Companies looking to acquire other firms can use the increased value of their stock to offer more equity percentage in a bid, reducing the amount of cash needed for the deal. Target companies will use their inflated stock prices to justify increased valuations. In addition, the cheap cost of debt due to low interest rates allows firms to raise more cash, if necessary, to fund a deal. The favorable market conditions actually apply to all M&A - not specifically healthcare, but nonetheless drives healthcare M&A.

Back to the healthcare sector, the S&P 500 Healthcare Index has been up 10% while the S&P 500 lags behind at 7% YTD. In addition, the 20 top Big Pharma firms have an average debt to capital ratio of 22.7% compared to 37% for the entire S&P 500. It’s no surprise that with this extra cash and lack of debt on their balance sheets, pharmaceutical companies are pursuing acquisitions as a way of effectively spending their earnings.

However, not all drugmakers are actively pursuing takeover deals. Firms such as Sanofi have stated their intentions to focus on organic growth, joined by Allergan and AstraZeneca, which have both expressed confidence in their ability to increase sales and profits without needing a strategic buyer.

Prior to Valeant’s bid for Allergan going hostile, Allergan CEO David Pyott accused Valeant of buying up smaller drugmakers and gutting them out by re-marketing existing products rather than focusing on organic growth through R&D. AstraZeneca also ensured shareholders that it was capable of increasing sales independently, as one of the reasons for rejecting Pfizer’s bid.

While I applaud these firms for their efforts in organic growth, focusing on the traditional route of internal pipeline development is no longer a viable option in today’s competitive environment. Drug R&D is more expensive than ever before, and Big Pharma with its patent cliffs can no longer take the financial risk of investing too much into their internal pipelines. Clinical trials can still be wildly unpredictable, and in many cases, it simply makes more economic sense to pay a premium to buy out a biotech that has already had success with its R&D.

Big Pharma will continue to acquire smaller biotechs for the foreseeable future, as these moves will make sense for both sides even when the market hits a downturn and interest rates rise. However, I expect inversion-driven acquisitions to die down after 2014. After all, these firms only need to re-incorporate once.

Pressure is also mounting on Washington to take action against tax inversions, and after this mid-term election cycle, we could see legislation making inversions more difficult, or removing any incentive for firms to leave the U.S. in the first place. Any Big Pharma that is seeking a more tax-friendly corporate environment through M&A has already announced such a deal, or most likely has a deal in the works.
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(5 votes)

At 12 PM EST on Monday, May 26th, the deadline officially passed for AstraZeneca to accept a takeover offer from Pfizer. The two major pharmaceutical firms have been in a takeover battle for the last month, and this was the third offer American drugmaker Pfizer made to the board of U.K. based Astrazeneca, consisting of cash and stock valued at $118 billion.

The offer valued each share of AstraZeneca at about $92.50, which is a 30% premium to the stock’s closing price of $72.28 on Friday the 23rd and a 58% premium on the stock’s pre-takeover talks price in January. A successful acquisition would’ve created the world’s largest pharmaceutical company, in what has been a series of recent mergers and acquisitions in the pharmaceutical industry this year.

Astrazeneca rejected an offer by Pfizer earlier this year for $98.6 billion, prompting Pfizer to make a renewed offer in early May for $106 billion, which was also quickly rejected. Pfizer sweetened the deal on May 18th, by announcing a final offer valued at $118, with 45% cash and 55% stock. Due to UK takeover rules, the indication of a “final” offer meant that Pfizer can no longer alter the valuation, only the cash-stock ratio until May 26th, after which the U.S. pharmaceutical giant must walk away for at least three months, when AstraZeneca can opt to re-enter negotiations. This raised initial concerns that Pfizer would pursue a hostile takeover, where they would directly approach AstraZeneca shareholders to bypass the management’s unwillingness to give in, but Pfizer later calmed those worries by stating that it won’t take the hostile route.

If the two companies can reach a middle ground sometime in the near future, they both stand to gain tremendously. Pfizer’s revenue has been declining for the last few years due to weakening sales from major drugs such as Lipitor and Viagra, which have come off-patent. AstraZeneca has a promising oncology pipeline, which management predicts could lead to a revenue growth of 75% by 2023.

In addition, Pfizer’s takeover of a British company would allow the newly merged companies to re-incorporate in the UK, a strategic move known as an “inversion,” with a 6-7% reduction in the corporate tax rate and savings of up to $1 billion annually in taxes. Both firms can also increase margins by taking advantage of cost synergies such as getting rid of overlapping functions.

The pressure is now on AstraZeneca, which didn’t engage in any meaningful negotiations with Pfizer, and seems confident in its potential as an independent pharmaceutical company. Although AstraZeneca has had great results from clinical trials in its oncology pipeline so far, drug pipelines are inherently unpredictable, and successful clinical trials don’t necessarily correlate with strong demand and sales, something which Pfizer has experienced in many of its new drugs. The high premium offered by Pfizer even convinced large shareholders such as BlackRock, which is the largest investor in AstraZeneca and second largest in Pfizer, to urge the former to re-enter negotiations as soon as possible.

What’s done is done, and we can only sit and watch for the next three months as these two firms are prohibited from any takeover negotiations. During this time, Pfizer needs to re-consider its R&D development and spending if they’re willing to pay such a high premium for a firm with a younger pipeline. If Pfizer is going to potentially take on new drug projects from AstraZeneca and spend all that cash and expect to produce better earnings results, then maybe they should consider some current drug projects that could be cut from Pfizer’s pipeline.

AstraZeneca will need to re-consider its negotiation strategy, especially since Pfizer has shown a willingness to adjust valuation and cash-stock ratio, and evaluate if they can actually perform well enough independently to justify rejecting a 58% premium on its pre-takeover talks stock price.

In three months time, I wouldn’t be surprised to find AstraZeneca coming back to the table with Pfizer, something which the Pfizer board should welcome with open arms. I can see two possible scenarios for these negotiations. AstraZeneca has many treatments currently in phase III clinical trials, and any positive results, especially in the oncology sector should persuade Pfizer to offer the additional 10% that AstraZeneca said would be necessary for a possible deal.

However, AstraZeneca is now under a great deal of pressure to perform, and any negative clinical trial results, or even the lack of positive results in the near future could rally shareholders to convince management to re-negotiate with Pfizer, almost certainly resulting in a lower valuation than what Pfizer offered in its last bid.

Stay tuned for my next article on the recent trend of pharmaceutical and biotech deals, and what this means for the future of the healthcare sector.
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(2 votes)
The S&P 500 headed into Memorial Day Weekend at its all time high, closing at 1,900.53. The Dow finished the week closing at 16,606.27. HP jumped 6.1% to $33.72 on news that the computer maker would cut jobs in an effort to turn around the company. Despite the recent decline in biotech and internet names, US equities have regained their traction from 2013.

 The 10yr Treasury note finished the week with a yield of 2.54%, reversing its decline for the week. The 2yr note and 30ry bond finished the week with yields of 0.34% and 3.40% respectively. Going against expectations heading into 2014, yields have declined from the end of 2013. So far, continued uncertainty over the economy and turmoil around the world has driven safe haven demand.

Although missing expectations, existing home sales increased by 1.3% in April to an annualized rate of 4.65 million units. New home sales also rose 6.4%. Existing homes and new homes inventories also rose. Last week's housing market data showed promise of a recovery in sales in the housing market. Sales are still significantly behind what they were a year ago; homes sales have been hampered by higher mortgage rates as well as an abnormally cold winter.

With US and UK markets closed for the holiday, the Nikkei hit a seven-week high on Monday, reaching highs of 14,602.52. Some sources have stated that informal discussions have begun within the Bank of Japan of an exit program of their quantitative easing program.

Overnight, ECB chief Mario Draghi continued dialogue of potential ECB action. Concerns over deflation in the Euro-zone have dominated the ECB for the past year. Despite Draghi's rhetoric, some critics are pushing for some type of action. Though unlikely, possibilities of some type of quantitative easing program were raised in a recent ECB meeting. Last week, the Stoxx Europe 600 rose for the 6th straight week closing at 341.76.

The Euro traded at $1.3644 against the dollar on Monday. The USD traded at ¥102.05 against the Yen. With the potential of ECB action, the Euro remains vulnerable. If Draghi decides on some type of quantitative easing program, the Euro could fall significantly against its peers. The Yen remains near an almost two week high against the USD.

Gold for June delivery remained below $1,300, trading at $1,290 per troy ounce. The metal has risen almost 8% from its dismal levels at the end of 2013, partly because of the situation in Ukraine. However, for the most demand has shied away. WTI Crude for July delivery traded at its highest price in almost a month, reaching $104.39. Last week, government reports showed that supplies dropped as imports fell to a 17 year low. The rise in crude prices for 2014 is in stark contrast of the decline in 2013, which was driven by supplies from shale formations.

Despite the holiday shortened week ahead, several key indicators will be released. Among them, Durable Goods Orders will be released on Tuesday and US GDP numbers will be released on Thursday.

Consensus for April has Durable Goods Orders decreasing by 0.8% for the month April, compared to a 2.6% gain in March. Consensus Q/Q change is -0.5%, compared to 0.1% last quarter.

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(3 votes)
2013 was the best year for auto makers in the United States since the events of 2007-08. Consumers who had held off on auto purchases because of economic uncertainties finally decided to invest in new vehicles. One of the auto companies with the most impressive year was Ford (NYSE: F), whose retail sales gained 13% on 2013. The Ford F-Series continued its 32 year streak of being the top selling automobile, as Ford had a great year all around. For the year 2013, Ford is projected to earn a net income of around $8B, including a decade best $2.1B in Q1 2013 driven by North American sales.


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(5 votes)
Along with most of the stock market in 2013, PNC (NYSE:PNC) had a terrific year. The stock went from $60 with minor bumps along the way to its current price at the time of this writing of $78.77. The bank has grown significantly since the credit crisis with acquisitions of National City in 2008 and more recently RBC's branches in the southeast. Currently, in terms of deposits, the bank is the 6th largest in the United States, placing it on the border of a national and regional bank.

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(5 votes)
In a week shortened by Christmas, a flurry of economic data seemed to support the Fed's decision to begin tapering next month. Consumer spending was up in November by 0.5%. The University of Michigan's consumer sentiment index was up from 75.2 to 82.5, on retailer discounts and stronger views on the economy.

Orders of durable goods in November were up 3.5%, beating expectations. The core number, excluding aircraft purchases, showed that orders increased by 4.5%. New home sales fell slightly in November to 464,000, but a revision to 474,000 for October showed the fastest pace of sales since 2008. Jobless claims dropped 42,000 to 338,000.

The government of China revealed that 2013 GDP grew at a pace of 7.6%, slightly better than targets of 7.5% as the growth of the economy continues to slow amid the government's agenda for more sustainable growth.

The Dow and S&P finished the week higher, despite pullbacks on Friday. The indices closed at 16,478.41 and 1,841.40 respectively. Twitter (TWTR), dropped over 10% on Friday following a downgrade by Macquarie. The stock has surged since its IPO price of $26, despite posting losses. Shares of Twitter closed Friday at $63.75.

The Nikkei closed at 16,178.21, topping 16,000 for the first time in 6 years. The index continues it meteoric rise following Prime Minister Shinzo Abe's aggressive policies to spark the Japanese economy.

The 10yr Treasury Note Yield broke 3% for the first time in over two years. The benchmark rate has risen since the Fed's decision to begin tapering in January earlier this month. The 2yr Note and 30yr Bond finished the week with yields of 0.39% and 3.94% respectively.

WTI Crude for January delivery closed at $100.32, for the first time in two months as inventories dropped unexpectedly due to increased demand. The recent cold weather has sparked rallies in energy commodities. Natural gas has surged since November; natural gas for January delivery finished the week at $4.37. Gold capped the longest rally in four months, as contracts for delivery in February closed the week at 1,214.00. Gold has dropped almost 30% this year amid stronger signs of economic growth. The metal is headed for its first decline since 2000.

The Euro reached its highest level against the dollar in almost two years finished the week at $1.3749, reaching as high as $1.39 during the trading day on Friday. The US dollar advanced against the Yen for the week, finished the week at 105.1700.

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(2 votes)
Strong economic data reversed the course of the markets on Friday. The US economy added 203,000 jobs in November compared to expectations of 185,000. The unemployment rate unexpectedly decreased from 7.2% to 7.0%. The participation rate also crept up from 62.8% to 63.0%. The jobs report further fueled speculation of a taper by the Federal Reserve as early as the upcoming December FOMC meeting. The University of Michigan's Consumer Sentiment Index surged to 82.5 from 75.1, the highest headline number in five months.

 US stocks rebounded on Friday, following a week of declines. The S&P 500 and Dow erased most of the week's declines, closing at 1,805.09 and 16,020.20 respectively. Friday's gains provided more evidence that the market is moving away from its "good news is bad news for stocks", as the market becomes more comfortable with the possibility of tapering. The VIX, a measure of the implied volatility in S&P 500 options, declined to 8.6% snapping an eight day streak of gains.

Following the jobs report, the 10yr Treasury note fell as the yield rose to 2.86% approaching the highs of September. The 2yr note yield finished the week at 0.30%, staying relatively stable due to Ben Bernanke's pledge of keeping short term rates low for the foreseeable future. The 30yr bond finished the week with a yield of 3.89%. The 2yr, 10yr, and 30yr swap rates finished the week at 0.40%, 2.94%, and 3.83% respectively.

The dollar gained against the Yen to ¥102.91 following the strong jobs number. The Euro saw support from the ECB's decision to not implement negative interest rates which the market had initially expected, closing the week at $1.37.

WTI Crude for January delivery finished the week at $97.65, capping off the biggest weekly gain since July. Gold approached $1,200, as the metal for January delivery closed at $1,229.

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